Osborne’s North Sea Oil Tax May Block $3 Billion of Sales

U.K. Chancellor of the Exchequer George Osborne raised the tax rate on oil production profit to 62 percent from 50 percent to pay for a tax cut on gasoline for consumers. Photographer: Rupert Hartley/Bloomberg

March 25 (Bloomberg) -- George Osborne’s increased tax on
U.K. oil production risks holding back investment in the North
Sea and stalling BP Plc and ConocoPhillips’s plans to sell off
mature assets.

The tax changes announced by the chancellor of the
exchequer in this week’s budget will lower the value of fields
on the block in the U.K. continental shelf, where deals have
already been hampered by the cost of dismantling decades-old
platforms, analysts and executives said.

“I know of one deal that stopped within half an hour of
that tax being announced,” said Mike Tholen, economics and
commercial director at Oil & Gas U.K., an industry lobby group,
declining to specify the deal. “We had seen asset sales
starting to decline already when companies were worried about
decommissioning, and the uncertain tax regime makes it much
harder to work out prices.”

Osborne raised the tax rate on oil production profit to 62
percent from 50 percent to pay for a tax cut on gasoline for
consumers. Shares of EnQuest Plc, Valiant Petroleum Plc and
other producers focused on the North Sea plunged.

There are currently as much as $3 billion of assets for
sale in U.K. waters, according to PLS Inc.’s Mergers and
Acquisitions database. The biggest seller is BP, seeking buyers
for about $1 billion in fields in the southern North Sea.
ConocoPhillips has announced it’s selling as much as $1 billion
of fields and Exxon Mobil Corp. has said it is looking to divest
U.K. assets.

Decommissioning Burden

London-based BP spokesman David Nicholas said the
announcement of the tax change hasn’t altered plans to sell U.K.
assets. ConocoPhillips spokesman John Roper said the company
didn’t comment on pending legislation. ExxonMobil declined to
comment.

While smaller companies would be able to extract more crude
and extend the life of the installations, the U.K. law that
holds sellers responsible for decommissioning if the buyer can’t
pay is leading sellers to demand letters of credit for the
potential costs, Iain McKendrick, Chief Executive Officer of
Ithaca Energy Ltd., said in an interview. That adds to the
expense of the deal and can stop smaller companies from taking
on older fields.

“The cavalry certainly isn’t storming over the hill to buy
these assets,” Graham Stewart, CEO of Faroe Petroleum Plc, said
in an interview at the Acquisition & Divestiture Summit in
London March 23. “Getting letters of credit for smaller
companies really limits their debt capacity.”

EnQuest, Nautical

EnQuest, one of the largest independent producers focused
on the North Sea that has said it’s looking to acquire more
fields, is down 12 percent since the announcement. Nautical, a
stakeholder in the Don field with EnQuest, is down 7 percent.
Ithaca recovered from a decline after saying that its tax losses
mean the company is unlikely to be affected by the tax change
for the next five years.

The rate of output decline in the North Sea slowed last
year to about 5 percent from a 6.5 percent average over the last
decade, according to Oil & Gas U.K. Britain’s offshore reserves
still hold 11.6 billion barrels of oil equivalent and would have
attracted at least 8 billion pounds ($13 billion) of investment
this year before the tax was announced, according to the lobby
group.

“The value of assets will be lower, but the bigger issue
is in decisions to commit capital,” said Jon Clark, director of
oil & gas transaction services at Ernst & Young LLP in London.
“The North Sea has to be compared to other regions, and with a
less favorable regime people might decide to go elsewhere.”

Third Change

Osborne’s tax is the third change to the system in a decade
that has seen the government’s tax take double, Morgan Stanley &
Co. analyst Theepan Jothilingam said in an e-mailed note
yesterday. The biggest producers in the U.K. are BP, Total SA,
Royal Dutch Shell Plc and Conoco, he said.

Centrica Plc, Britain’s largest utility which produces
almost 7 percent of U.K. output, will add to its North Sea
production assets to provide gas for its 5 million U.K.
customers, CEO Sam Laidlaw said in an interview last month.
Centrica, whose shares fell as much as 10 percent on March 23,
also said last October it would sell about $600 million of North
Sea fields to focus on its most lucrative areas.

“Valuations of U.K. assets have been lowered by 15 to 20
percent,” said James Hosie, an analyst at RBC Capital Markets
in Edinburgh, in an e-mailed note yesterday. “The rate rise is
particularly unfortunate for potential sellers of North Sea
assets.”